Question

Why is there often a conflict between the performance evaluation and cost-minimization objectives of transfer pricing?

A) Because performance evaluation aims to maximize profits, while cost minimization focuses on reducing expenses.
B) Because transfer pricing seeks to align with market prices, which may conflict with cost minimization goals.
C) Because cost minimization prioritizes efficiency, while performance evaluation emphasizes revenue generation.
D) Because transfer pricing aims to allocate costs accurately, while performance evaluation tends to overemphasize profit margins.

Answer 1

The conflict between performance evaluation and cost-minimization objectives of transfer pricing arises because transfer pricing aims to align with market prices, which may conflict with cost minimization goals.

Step-by-step explanation:

The conflict between performance evaluation and cost-minimization objectives of transfer pricing arises because transfer pricing aims to align with market prices, which may conflict with cost minimization goals. Transfer pricing involves setting prices for goods or services transferred between divisions or entities within the same company. Performance evaluation, on the other hand, focuses on measuring the effectiveness and efficiency of individuals, departments, or divisions within a company.

An example of this conflict can be seen when a division within a company sells a product to another division at a higher price than the market price, in order to increase its profits as part of the performance evaluation. However, this conflicts with the cost minimization objective, as the buying division may be able to purchase the product at a lower cost from an external supplier.

In summary, the conflict between performance evaluation and cost-minimization objectives of transfer pricing occurs because transfer pricing focuses on aligning with market prices, while cost minimization aims to reduce expenses.